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Senate Agrees on Bill to Ease Foreclosures

April 7, 2008

Senate leaders announced an agreement Wednesday on legislation to ease the slumping housing market and help millions of families threatened by foreclosure.

The scaled-back proposal released by Majority Leader Harry Reid, D-Nev., and GOP Leader Mitch McConnell of Kentucky contains an amalgam of ideas aimed at boosting demand for housing and helping homeowners saddled with subprime mortgages avoid foreclosure. For instance, the plan contains $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance subprime mortgages and a $7,000 tax credit for people buying new homes or properties in foreclosure.

“It is a robust package,” Reid said. “This is good news for the American people.”

But economists across the political spectrum sounded skeptical that the measure would have much practical effect to ease the wrenching crisis in the housing market and the wave of foreclosures spreading across the country. “They’re good steps, but they’re small steps and certainly not big enough steps to solve the problem,” said Mark Zandi, chief economist for Moody’s Economy.com. “I don’t think it’s going to be enough to solve the housing problem, at least not in 2008.”

Reid did not release details, but staff aides described a still-being-drafted measure containing several elements from a bill Democrats have touted for weeks. The measure also contains a provision dropped from February’s stimulus measure that would permit homebuilders and other money-losing businesses to reclaim previously paid taxes, new disclosure requirements aimed at preventing unsophisticated borrowers from being duped by mortgage brokers, and additional money to provide counseling to people threatened with foreclosure and help them in negotiating with their lenders.

Republicans forced Democrats to drop efforts that Zandi and other economists said might have proven more effective in alleviating the crisis, including a controversial plan opposed by banks and their GOP allies to change bankruptcy laws to help borrowers trapped in subprime mortgages keep their homes. Banking Committee Chairman Christopher Dodd, D-Conn., was forced to leave out of the bill a plan to have the Federal Housing Administration guarantee perhaps $400 billion worth of refinanced loans if lenders reduce loan amounts to reflect reduced home values.

The measure will contain a broader rewrite of the FHA that reduces down payments on FHA-insured loans and raises the dollar limit on mortgages that FHA can insure. “This package addresses the core issues of this crisis, including foreclosure mitigation, mortgage counseling, FHA modernization and homeowner tax credits, among other provisions,” Reid and McConnell said in a joint statement. Reid said he hoped the measure could quickly pass, though it faces a flurry of amendments from senators in both parties.

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